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AICPA committee calls for different dividing line on leases

An American Institute of CPAs committee has suggested that the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) create a dividing line between Type A and Type B leases that is different from the line the boards proposed.

In a letter submitted to the boards Monday, the AICPA Financial Reporting Executive Committee (FinREC) supported the objectives of the leases proposal, which calls for more transparency and recognition on-balance sheet for all leases other than short-term leases.

FinREC, which is authorised to make public statements on behalf of the AICPA on financial reporting matters, also supported the proposal’s dual-model approach for lessee and lessor accounting. But FinREC disagreed with the proposed tests that would determine whether a lease is classified as a Type A or Type B lease.

The FASB/IASB proposal would classify leases as Type A when a more-than-insignificant amount of the value of the asset is consumed during the lease period. This would include most leases other than property, such as equipment and vehicle leases. Leases during which an insignificant amount of the value of the asset is consumed – such as most property leases – would be classified as Type B by the boards.

“They’ve made a cut that’s based on property and is relatively complex,” FinREC Chairman Richard Paul, CPA, said in a telephone interview. “We think the cut could be simpler and based on the economics of the lease.”

FinREC suggested a different dividing line from the “more than insignificant” test. FinREC recommended that leases consistent with in-substance finance purchases be accounted for as Type A leases and that other leases be accounted for as Type B.

With the new dividing line, FinREC would support the basic accounting provisions the boards proposed for the two types of leases. Those call for Type A lessees to recognise a right-of-use asset and lease liability, initially measured at the present value of the lease payments, and recognise the unwinding of the discount on the lease liability as interest separately from the amortisation of the right-of-use asset.

Type B lessees would recognise a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, and would recognise a single lease cost on a straight-line basis, combining the unwinding of the discount on the lease liability with the amortisation of the right-of-use asset.

The boards’ proposals have faced heavy criticism from financial statement preparers and businesses that say the proposals would create significant costs and complexity. Many investors, too – including FASB’s own Investor Advisory Committee – have rejected the proposal.

FinREC acknowledged some of the concerns, saying the classification test should be based on clearly articulated principles and field-tested to ensure that it is operational. FinREC also suggested that the board give robust consideration to costs and benefits as it formulates a final standard.

But while FinREC does not support the current proposal, the committee is encouraging the boards to continue working towards a converged standard in a project that is difficult because of the wide variety of leases that exist.

“When you’re dealing with something as pervasive, that crosses as many industries as leases, it’s really important to get to a converged solution because comparability is the objective when you’re talking about convergence,” Paul said. “It certainly would be beneficial when comparing entities domestically and internationally with something as fundamental as leases, that the accounting standard be converged.”

Paul said FinREC disagrees with some commenters who suggested that the boards forget about coming to a converged solution that provides more transparent accounting for leases. He said it would be “a waste” to give up the project after investing a lot of time and resources on a worthwhile goal.

“It is a challenge,” Paul said. “We are supportive of the effort. We’d like to see this get finalised, but we think there is an improvement to be made. We think there’s more work to be done before it’s finalised.”

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